Ask Matt: Are stock buybacks extinct?

A: Companies have a secret weapon to keep earnings-per-share moving higher without much effort. But this technique is losing some of its power.

Companies have been aggressively buying back their own shares. Share buybacks are a coup for companies because it allows them to boost earnings-per-share without making any improvement to the business. The company can cut profit into fewer pieces, propping up earnings growth as long as the business is stable.

There are several problems with buybacks, though. They allow management teams to top profit forecasts set for them, without making the underlying business better. Buybacks also consume cash that could be used to actually boost net profit. Above all, when companies slow down their pace of buybacks, that can put pressure on earnings-per-share growth. And that’s why investors are a concerned the dollar value of stock buybacks in the second quarter is 30% below the first quarter of 2014, says S&P Dow Jones Indices, which was the second biggest ever. Companies pulling back on buybacks isn’t all bad. Companies have a bad track record timing transactions. And just while buybacks are down, they’re not gone. Another surge in profit will certainly be followed by buybacks, in addition to acquisitions and dividends.

But investors need to know one factor propping up profit has faded for now.

USA TODAY markets reporter Matt Krantz answers a different reader question every weekday. To submit a question, e-mail Matt at mkrantz@usatoday.com or on Twitter @mattkrantz.